Small Businesses Take Fundraising Public

Companies Seek More Ways to Raise Cash After the SEC Lifts Long-Standing Ban

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Gregory Lok, co-founder of online home décor marketplace Joy & Revelry, aims to be selective about where the company seeks investors.
Ramin Rahimian for The Wall Street Journal

By

Angus Loten

Sept. 25, 2013 7:32 p.m. ET

Rick Field posted an eye-catching orange-and-blue "FUND US" notice on his company's website Monday near an image of a jar of kosher organic dill spears. The public fundraising plea might have put his New York-based artisanal pickle business, Rick's Picks LLC, in legal trouble a week ago.

Clicking on the notice opens a direct link to the Rick Pick's fundraising page on CircleUp Network Inc., a third-party platform that connects accredited investors with small or nascent consumer-product businesses looking to raise funds.

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"If I did this last week, we would have gotten a nasty letter from the Securities and Exchange Commission," says Mr. Field, a 50-year-old former TV producer at VH1. He hopes to raise a total of $1.38 million from people who put in at least $10,000 apiece, in order to boost inventories and expand his product line.

This week thousands of new and small private businesses, like Rick's Picks, launched public marketing blitzes to sell shares in their companies—a tactic that securities regulators barred more than 80 years ago to protect investors from get-rich-quick scams. On Monday, the SEC lifted that ban, allowing small private companies to publicize investment offers without having to register an initial public offering—which can be a costly and burdensome requirement for those businesses—provided the sales are limited to wealthy investors.

Mr. Field says he plans to selectively tout the investment offer on Facebook and Twitter, to reach as many potential pickle investors as possible. It's a strategy some say might backfire by chasing away serious investors, while opening the door to fraud.

The public fundraising move is a central provision of the Jumpstart Our Business Startups Act, approved by Congress last year, which seeks to ease restrictions on small businesses raising cash to grow.

Douglas Penman, for instance, says he is planning to make T-shirts promoting investment opportunities in his San Francisco startup, Nukotoys Inc., which makes children's educational trading cards for mobile devices. He's hoping to have the T-shirts worn by skyscraper window washers, to catch the eye of wealthy executives inside. The company, launched in 2010, is looking to raise $2 million to expand its user base, he says.

As of Wednesday, 43 ventures had filed paperwork with the SEC indicating their intent to use the general solicitation rule to sell shares of their businesses to members of the public, using traditional advertising campaigns, or through social media, such as Twitter, Facebook or YouTube. The minimums sought per investor ranged from $100 for a New York state rural broadband project to $100,000 in a California high-technology company, according to SEC filings, which were reviewed by The Wall Street Journal.

Companies that raise capital under the new rules are required to notify the SEC within 15 days of the first sale, if they haven't done so already.

Tony Ramos, the founder of the Rural Broadband Co., a Washington-based startup, filed paperwork with regulators Monday morning. He is seeking $16 million from investors for a $23 million project to expand broadband coverage in the mid-Hudson region of New York state. To reach as many investors as possible, he has posted the offer on the company's website, along with two similar offers for projects in other rural areas. He plans to post offers on Twitter and Facebook later this week.

"It's a strategic move for us," said Mr. Ramos of filing the regulatory paperwork early. "We know this is going to be a good avenue and we wanted to get out in front, and be as transparent about it as possible," he adds. By filing early, he says, individuals who come across the company's website, and are interested in investing in the projects, can readily access company data from the SEC.

Brad McNamara is planning to encourage his customers to place investment offers on the sides of their 40-by-9-foot shipping containers, which his Boston-based startup, Freight Farms, converts into portable commercial produce gardens. The company, launched last year, sells the containers for $60,000 each and already has $500,000 in revenue, he says. By helping customers, who sell produce from the containers, to raise capital for their gardens through investment offers, "it becomes a product that can produce food and produce returns," says Mr. McNamara.

Gregory Lok, who launched an online home décor marketplace in March, says he wants to be more selective about where the company seeks investors under the rule change, by running ads on professional sites like LinkedIn. "You have to be very careful about who you bring into your company," he says, adding that beyond cash, early-stage ventures need investors who can act as mentors with strong networks and other resources to help get a fledgling business off the ground.

He says he worries that these types of investors won't be interested in working with an early-stage company that has advertised shares on Facebook, Twitter or on roadside billboards to the general public.

For now, Mr. Lok's San Francisco-based company, Joy & Revelry, is promoting its offer on AngelList, an online network that connects startups with pools of accredited investors. Until this week, AngelList only posted such offers to a limited group of registered users. But this week the online network posted offers from more than 1,500 startups, including Joy & Revelry, on its public home page—proclaiming public fundraising is here: "Tell the world you're raising money."

Other rules the SEC is considering include advance filing requirements for small businesses that want to promote offers publicly, as well as submission of all general solicitation materials to regulators.

Under the current SEC rules, business owners must verify that they're taking cash only from individuals with at least $200,000 in annual income or more than $1 million in liquid assets. Still, state securities regulators and other critics fear the rule change will lead to splashy ads by fraudsters trying to lure unsophisticated individuals into giving away their cash.

Shyp, a San Francisco logistics and shipping startup, has already benefited from the rule change. The company raised $250,000 in equity on AngelList in less than an hour on Monday, after its offer was promoted by Tim Ferriss, an influential startup investor, on his blog. Mr. Ferriss, whose blog has more than 1.4 million readers, has also invested $25,000 into the business. Monday's rapid-fire funding round quickly closed with $2.1 million raised. It was launched by the fledgling company more than two months ago, according to co-founder Kevin Gibbon.

"It was really amazing, it's a very powerful thing," Mr. Gibbon says about the new public fundraising rules. "It gives people with a big following the ability to leverage their network," he adds.

Joe Wallin, a partner at Davis Wright Tremaine LLP, says businesses that use the rule change to publicly promote equity sales would do well to file the necessary paperwork sooner, rather than later.

"There's a lot of generalized regulatory uncertainty out there right now," he says. It's easy for 15 days to go by after that company's first sale, he adds, and miss the SEC filing deadline. Under proposed rules by the SEC, businesses that miss filing deadlines can be barred from raising additional capital for a full year.

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